SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998, OR
-----------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______
Commission file number 0-22025
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AASTROM BIOSCIENCES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 94-3096597
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
24 Frank Lloyd Wright Dr.
P.O. Box 376
Ann Arbor, Michigan 48106
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip code)
(734) 930-5555
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(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] - Yes [_] - No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 16,486,635
(Class) Outstanding at February 1, 1999
AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
December 31, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
a) Condensed Balance Sheets as of June 30, 1998 and
December 31, 1998 3
b) Condensed Statements of Operations for the three and
six months ended December 31, 1997 and 1998 and for
the period from March 24, 1989 (Inception) to
December 31, 1998 4
c) Condensed Statements of Cash Flows for the six months
ended December 31, 1997 and 1998 and for the period
from March 24, 1989 (Inception) to December 31, 1998 5
d) Notes to Condensed Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1998
----------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,078,000 $ 9,852,000
Short-term investments 9,134,000 1,000,000
Receivables 167,000 175,000
Prepaid expenses 270,000 101,000
----------- -----------
Total current assets 11,649,000 11,128,000
PROPERTY, NET 725,000 612,000
----------- -----------
Total assets $12,374,000 $11,740,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,313,000 $ 1,629,000
Accrued employee expenses 150,000 145,000
Current portion of capital lease obligations 65,000 30,000
----------- -----------
Total current liabilities 1,528,000 1,804,000
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; shares
authorized 5,000,000; shares
issued and outstanding 2,200,000
and 4,000, respectively 9,930,000 3,742,000
Common stock, no par value; shares
authorized - 40,000,000; shares
issued and outstanding - 13,639,817
and 16,473,258, respectively 59,474,000 70,677,000
Deficit accumulated during the development stage (58,897,000) (64,818,000)
Stock purchase warrants 335,000 335,000
Unrealized gains on investments 4,000 -
----------- -----------
Total shareholders' equity 10,846,000 9,936,000
----------- -----------
Total liabilities and shareholders' equity $12,374,000 $11,740,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended March 24, 1989
December 31, December 31, (Inception) to
-------------------------- -------------------------- December 31,
1997 1998 1997 1998 1998
---------- ---------- ---------- ----------- ------------
REVENUES:
Grants $ 49,000 $ 207,000 $ 62,000 $ 370,000 $ 2,390,000
Research and development agreements - - 3,000 - 2,389,000
------------- ----------- ------------ ----------- ------------
Total revenues 49,000 207,000 65,000 370,000 4,779,000
------------- ----------- ------------ ----------- ------------
COSTS AND EXPENSES:
Research and development 3,788,000 3,165,000 7,031,000 6,258,000 60,188,000
General and administrative 883,000 696,000 1,496,000 1,347,000 13,247,000
------------- ----------- ------------ ----------- ------------
Total costs and expenses 4,671,000 3,861,000 8,527,000 7,605,000 73,435,000
------------- ----------- ------------ ----------- ------------
LOSS FROM OPERATIONS (4,622,000) (3,654,000) (8,462,000) (7,235,000) (68,656,000)
------------- ----------- ------------ ----------- ------------
OTHER INCOME (EXPENSE):
Other income - 1,237,000 - 1,237,000 1,237,000
Interest income 216,000 142,000 436,000 363,000 3,501,000
Interest expense (2,000) (1,000) (7,000) (3,000) (266,000)
------------- ----------- ------------ ----------- ------------
Other income 214,000 1,378,000 429,000 1,597,000 4,472,000
------------- ----------- ------------ ----------- ------------
NET LOSS $ (4,408,000) $(2,276,000) $ (8,033,000) $(5,638,000) $(64,184,000)
============= =========== ============ =========== ============
COMPUTATION OF NET LOSS APPLICABLE TO
COMMON SHARES:
Net loss $ (4,408,000) $(2,276,000) $(8,033,000) $(5,638,000)
Dividends and yields on preferred stock (47,000) (63,000) (47,000) (283,000)
Charge related to issuance of preferred
stock (3,439,000) - (3,439,000) -
------------- ----------- ------------ -----------
Net loss applicable to Common Shares $ (7,894,000) $(2,339,000) $(11,519,000) $(5,921,000)
NET LOSS PER COMMON SHARE
(Basic and Diluted) $ (.59) $ (.16) $ (.87) $ (.42)
------------- ----------- ------------ -----------
Weighted average number of common
and common equivalent shares
outstanding 13,268,000 14,271,000 13,273,000 13,978,000
============= =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
4
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
March 24, 1989
Six months ended (Inception) to
December 31, December 31,
--------------------------- ---------------
1997 1998 1998
----------- ----------- ---------------
OPERATING ACTIVITIES:
Net loss $(8,033,000) $(5,638,000) $(64,184,000)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 303,000 175,000 2,563,000
Loss on property held for resale - - 110,000
Amortization of discounts and
premiums on investments (82,000) (70,000) (453,000)
Stock compensation expense 320,000 4,000 1,632,000
Changes in assets and liabilities:
Receivables (39,000) (8,000) (199,000)
Prepaid expenses 73,000 169,000 (101,000)
Accounts payable and accrued expenses 391,000 316,000 1,629,000
Accrued employee expenses (32,000) (5,000) 145,000
------------ ----------- ------------
Net cash used for operating activities (7,099,000) (5,057,000) (58,858,000)
INVESTING ACTIVITIES:
Organizational costs - - (73,000)
Purchase of short-term investments (10,353,000) (1,000,000) (44,464,000)
Maturities of short-term investments 7,000,000 9,200,000 43,917,000
Capital purchases (89,000) (62,000) (2,438,000)
Proceeds from sale of property held for resale - - 400,000
------------ ----------- ------------
Net cash provided by (used for) investing activities (3,442,000) 8,138,000 (2,658,000)
FINANCING ACTIVITIES:
Issuance of preferred stock 9,930,000 4,689,000 48,837,000
Issuance of common stock 26,000 39,000 20,144,000
Payments received for stock purchase rights - - 3,500,000
Payments received under shareholder notes - - 31,000
Principal payments under capital lease obligations (88,000) (35,000) (1,144,000)
------------ ----------- ------------
Net cash provided by financing activities 9,868,000 4,693,000 71,368,000
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (673,000) 7,774,000 9,852,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,943,000 2,078,000 -
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,270,000 $ 9,852,000 $ 9,852,000
============ =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 7,000 $ 3,000 $ 266,000
Additions to capital lease obligations - - 1,174,000
============ =========== ============
The accompanying notes are an integral part of these financial statements.
5
AASTROM BIOSCIENCES, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
Aastrom Biosciences, Inc. (the "Company") was incorporated in March 1989
("Inception") under the name Ann Arbor Stromal, Inc. The Company changed its
name in 1991 concurrent with the commencement of employee-based operations.
The Company is in the development stage with its principal business
activities being research and product development, conducted both on its own
behalf and in connection with various collaborative research and development
agreements with others, involving the development of processes and products
for the ex vivo production of human cells for use in cell and ex vivo gene
therapy.
2. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company without audit according to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The financial statements reflect, in the opinion
of management, all adjustments (which consist solely of normal recurring
adjustments) necessary to present fairly the financial position and results
of operations as of and for the periods indicated. The results of operations
for the three and six months ended December 31, 1998, are not necessarily
indicative of the results to be expected for the full year or for any other
period.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission.
3. NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares are not included in the per share calculation where the
effect of their inclusion would be anti-dilutive. Upon the completion of the
Company's initial public offering, all outstanding shares of preferred stock
at that time were automatically converted into common stock. Accordingly,
such shares of preferred stock are assumed to have been converted into common
stock at the time of issuance.
The computation of net loss per common share reflects dividends, yields and
other adjustments relating to Company's preferred stock which affect only the
computation of net loss per common share and are not included in the
computation of net loss for the period.
6
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which sets forth additional requirements for companies to
report in the financial statements Comprehensive Income in addition to Net
Income. The Company adopted SFAS 130 as of July 1, 1998 which did not have a
material effect on the accompanying financial statements.
5. PREFERRED STOCK
In December 1998, all 2,200,000 shares of the Company's 5.5% Convertible
Preferred Stock were converted into 2,240,326 shares of common stock.
Additionally, during November and December 1998, a total of 1,000 shares of
the Company's Series I Convertible Preferred Stock were converted into
458,043 shares of common stock.
6. DISTRIBUTION AGREEMENT
In 1993 the Company entered into a product Distribution Agreement (the
"Distribution Agreement") with Cobe BCT, Inc. ("Cobe"). The Distribution
Agreement provided Cobe with worldwide marketing and distribution rights for
the AastromReplicell/TM/ Cell Production System ("System") and related
therapy kits for use in the field of stem cell therapy. The Company is
implementing the initial European market introduction of the
AastromReplicell/TM/ System and related therapy kits for the production of
either bone marrow derived cells or the expansion of umbilical cord blood
cells used in stem cell therapy. The Company believes that upon completion of
AastromReplicell/TM/ System and European market introduction for stem cell
therapy, development of additional therapy kits can be pursued for a number
of emerging cell therapies being developed by others. Such other cell therapy
applications were outside of the scope of the Distribution Agreement and
outside of Cobe's area of focus. Accordingly, the Company and Cobe terminated
the Distribution Agreement, effective November 16, 1998. In connection with
the termination, Cobe paid $1,237,000 to the Company which has been recorded
as Other Income in the accompanying Statements of Operations for the periods
ended December 31, 1998. Cobe currently owns approximately 2.4 million shares
of the Company's common stock, and as part of the termination agreement, Cobe
has agreed not to sell any such shares until at least January 1, 2001. The
Company believes that this action, which brings rights to all fields of use
to the Company, will better allow for a consolidated marketing plan to be
implemented for the AastromReplicell/TM/ System product line.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Since its inception, the Company has been in the development stage and engaged
in research and product development, conducted principally on its own behalf,
but also in connection with various collaborative research and development
agreements with other entities. The Company does not expect to generate positive
cash flows from operations for at least the next several years and until product
sales commence. Until product sales commence, the Company expects that its
revenue sources will continue to be limited to grant revenue, research funding
and milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future cash payments and revenues,
if any, will be subject to significant fluctuations, based in part on the
success of the Company's research activities, the receipt of necessary
regulatory approvals, the timing of the achievement of certain other milestones
and the extent to which associated costs are reimbursed under grant or other
arrangements. A substantial portion of all of the Company's revenues from
product sales, if any, will be subject to the Company's obligation to make
aggregate royalty payments of up to 2% to certain licensors of its technology.
Research and development expenses may fluctuate due to the timing of
expenditures for the varying stages of the Company's research, product
development and clinical development programs. Generally, product development
expenses for the AastromReplicell/TM/ System are expected to decrease as the
product progresses through market launch and clinical development costs are
expected to increase as the Company begins its U.S. pivotal clinical trials.
Additionally, marketing and general and administrative expenses are expected to
increase in support of European marketing activities. In November 1998, the
Company implemented a reduction in work force, affecting 19 staff positions and
certain other contract positions, reducing overall operating expenses by
approximately 15%. The reduction in headcount generally affected staff and
operations that were not required for product manufacturing and support or to
support the Company's clinical development programs. Under the Company's
license agreement with Immunex, annual renewal fees of $1,000,000 are payable in
March 1999 and March 2000. As a result of these and other factors, the
Company's results of operations have fluctuated and are expected to continue to
fluctuate significantly from year to year and from quarter to quarter and
therefore may not be comparable to or indicative of the result of operations for
any future periods.
Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations.
Although the Company reduced its workforce in November 1998, a future growth in
employee headcount may become necessary to address increasing requirements in
the areas of product and customer support, research, clinical and regulatory
affairs, quality systems and administration. Assuming capital is available to
finance such growth, the Company's operating expenses will increase as a result.
At least until such time as the Company enters into arrangements providing
research and development funding or initiates product sales, the Company will
continue to incur net operating losses. The Company has never been profitable
and does not anticipate having net income unless and until product sales
commence. Through December 31, 1998, the Company has accumulated losses of
8
$64,184,000. There can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all.
RESULTS OF OPERATIONS
Three and six months ended December 31, 1998 and 1997
Revenues for the quarter and six-month periods ended December 31, 1998,
consisted of grant funding and increased to $207,000 and $370,000, respectively,
from $49,000 and $65,000, respectively in 1997. The increases in revenues during
1998 are the result of an in increase in research activities under research
grants received by the Company.
Costs and expenses decreased to $3,861,000 for the quarter ended December 31,
1998 from $4,671,000 for the same period in 1997, and decreased to $7,605,000
for the six-month period ended December 31, 1998 compared to $8,527,000 in 1997.
The decreases in costs and expenses were principally the result of decreases in
research and development expense to $3,165,000 and $6,258,000 for the quarter
and six months ended December 31, 1998, respectively, from $3,788,000 and
$7,031,000 for the same periods in 1997. General and administrative expenses
also decreased to $696,000 and $1,347,000 for the quarter and six months ended
December 31, 1998, from $883,000 and $1,496,000, for the same periods in 1997,
primarily as a result of certain non-cash charges incurred in 1997.
Interest income was $142,000 for the quarter ended December 31, 1998, compared
to $216,000 for the same period in 1997, and was $363,000 for the six months
ended December 31, 1998, compared to $436,000 for the same period ending in
1997. These changes primarily reflect an overall decrease in the levels of
cash, cash equivalents and short-term investments during the periods.
Net loss for the quarter ended December 31, 1998 was $2,276,000, or $.16 per
common share, compared to a net loss of $4,408,000, or $.59 per common share for
the same period in 1997. Net loss for the six months ended December 31, 1998
was $5,638,000, or $.42 per common share compared to $8,033,000, or $.87 per
common share in 1997. The net loss for the periods ended December 31, 1998
include other income of $1,237,000 representing a one-time payment received from
Cobe in connection with the termination of the Company's marketing and
distribution agreement with Cobe in November 1998. The computations of net loss
per common share for the periods ended December 31, 1997, reflect a one-time
charge of $3,439,000 related to the sale of preferred stock by the Company in
December 1997. This one-time charge and dividends and yields on the Company's
preferred stock affect only the computation of net loss per common share and are
not included in the net loss for the periods.
Liquidity and capital resources
The Company has financed its operations since Inception primarily through public
and private sales of its equity securities, which from Inception through
December 31, 1998, have totaled approximately $74,419,000, and, to a lesser
degree, through grant funding, payments received under research agreements and
collaborations, interest earned on cash, cash equivalents, and
9
short-term investments, and funding under equipment leasing agreements. These
financing sources have historically allowed the Company to maintain adequate
levels of cash and other liquid investments.
The Company's combined cash, cash equivalents and short-term investments totaled
$10,852,000 at December 31, 1998, a decrease of $360,000 from June 30, 1998. The
primary uses of cash, cash equivalents and short-term investments during the six
months ended December 31, 1998, included $4,987,000 to finance the Company's
operations and working capital requirements, $62,000 in capital equipment
additions and $35,000 in scheduled debt payments. The Company plans to continue
its policy of investing excess funds in short-term, investment-grade, interest-
bearing instruments.
The Company's future cash requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patents, competing technological and market developments, the cost of product
commercialization and the degree of market acceptance of the Company's products.
The Company does not expect to generate a positive cash flow from operations for
at least the next several years due to continuing expenses for its research and
development programs and the expected cost of commercializing its product
candidates. The Company intends to seek additional funding through research and
development agreements with suitable corporate collaborators, grants, public or
private financing transactions and other means that may be available to the
Company. The Company anticipates that its available cash resources and expected
interest income thereon, will be sufficient to finance the development and
manufacture of the AastromReplicell/TM/ System for use in clinical trials,
expand its clinical trials, and to fund other research and development and
working capital and other corporate requirements through mid-1999. This
estimate is a forward-looking statement based on certain assumptions which could
be negatively impacted by the matters discussed under this heading and under the
caption "Business Risks" in the Company's Annual Report on Form 10-K. The
Company expects that its primary sources of capital for the foreseeable future
will be through collaborative arrangements and through the public or private
sale of its debt or equity securities. There can be no assurance that such
collaborative arrangements, or any public or private financing, will be
available on acceptable terms, if at all, or can be sustained. Several factors
will affect the Company's ability to raise additional funding, including, but
not limited to, market volatility of the Company's common stock and economic
conditions affecting the public markets generally or some portion or all of the
technology sector. If adequate funds are not available, the Company will be
required to further delay, reduce the scope of, or eliminate one or more of its
research and development programs, or curtail some or all or its operations,
which would have a material adverse effect on the Company's business. See
"Business Risks Future Capital Needs; Uncertainty of Additional Funding" in the
Company's 1998 Annual Report on Form 10-K and Notes to Financial Statements
included therein.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which sets
10
forth additional requirements for companies to report in the financial
statements Comprehensive Income in addition to Net Income. The Company adopted
SFAS 130 as of July 1, 1998 which did not have a material effect on the
accompanying financial statements.
CERTAIN BUSINESS CONSIDERATIONS
Product Development Uncertainties
Commercialization of the Company's technology and product candidates, including
its lead product candidate, the AastromReplicell/TM/ Cell Production System
("System"), will require substantial additional research and development by the
Company as well as substantial clinical trials. There can be no assurance that
the Company will successfully complete development of the AastromReplicell/TM/
System or its other product candidates, or successfully market its technologies
or product candidates, which lack of success would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company or its collaborators may encounter problems or delays relating to
research and development, market development, clinical trials, regulatory
approval and intellectual property rights of the Company's technologies and
product candidates. The Company's initial product development efforts are
primarily directed toward obtaining regulatory approval to market the
AastromReplicell/TM/ System as an alternative, or improvement, to currently used
stem cell collection methods. These existing stem cell collection methods have
been widely practiced for a number of years, and there can be no assurance that
any of the Company's technologies or product candidates will be accepted by the
marketplace as readily as these or other competing processes and methodologies,
or at all. The Company also plans to pursue through strategic relationships,
clinical applications of the AastromReplicell/TM/ System into emerging cell
therapies being developed by others. There can be no assurance that such
strategic relationships, if established, will successfully lead to commercial
applications of the AastromReplicell/TM/ System.
Termination of Cobe Distribution Agreement
In 1993 the Company entered into a product Distribution Agreement (the
"Distribution Agreement") with Cobe BCT, Inc. ("Cobe"). The Distribution
Agreement provided Cobe with worldwide marketing and distribution rights for the
AastromReplicell/TM/ Cell Production System ("System") and related therapy kits
for use in the field of stem cell therapy. The Company is implementing the
initial European market introduction of the AastromReplicell/TM/ System and
related therapy kits for the production of either bone marrow derived cells or
the expansion of umbilical cord blood cells used in stem cell therapy. The
Company believes that upon completion of AastromReplicell/TM/ System and
European market introduction for stem cell therapy, development of additional
therapy kits can be pursued for a number of emerging cell therapies being
developed by others. Such other cell therapy applications were outside of the
scope of the Distribution Agreement and outside of Cobe's area of focus.
Accordingly, the Company and Cobe terminated the Distribution Agreement,
effective November 16, 1998. In connection with the termination, Cobe paid
$1,237,000 to the Company which has been recorded as Other Income in the
accompanying Statements of Operations for the periods ended December 31, 1998.
Cobe currently owns approximately 2.4 million shares of the Company's common
stock, and as part of the termination agreement, Cobe has agreed not to sell any
such shares until
11
at least January 1, 2001. Thereafter, sale of the shares into the market could
effect the price of the Company's common stock. The Company believes that
termination of the Distribution Agreement, which brings rights to all fields of
use to the Company, will better allow for a consolidated marketing plan to be
implemented for the AastromReplicell/TM/ System product line. The
AastromReplicell/TM/ System consists of an automated clinical system designed to
enable hospitals to produce patient-specific cells for use in the treatment of a
broad range of diseases. The Company believes that with diverse fields of use,
the overall market development and customer interface plans will benefit from
the consolidation of the product line under disease-specific programs. There can
be no assurance that the Company will be able to enter into a new marketing and
distribution relationship on acceptable terms with another partner, if at all,
or that if such a marketing and distribution partnership is achieved, it will
result in the successful commercialization and distribution of the Company's
technologies and product candidates. Failure to enter into such a new
relationship, and any delay in the planning or implementation of distribution or
marketing activities while a new partnership is sought, will have a material
adverse effect on the Company's business, financial condition and results of
operations.
Uncertainties of Clinical Trials
The approval of the United States Food and Drug Administration (the "FDA") will
be required before any commercial sales of the Company's product candidates may
commence in the United States. The Company is currently conducting clinical
trials to demonstrate the safety and biological activity of cells produced in
the AastromReplicell/TM/ System in a limited number of patients. If the results
from these trials are successful, the Company intends to use these results to
support a limited market introduction of the AastromReplicell/TM/ System in
Europe and to seek clearance from the FDA to commence additional pivotal
clinical trials in the U.S., the first of which began in December 1998. The
patients enrolled in these trials and future trials will have undergone
extensive chemotherapy or radiation therapy treatments prior to infusion of
cells produced in the AastromReplicell/TM/ System. Such treatments will have
substantially weakened these patients and may have irreparably damaged their
hematopoietic systems. Due to these and other factors, it is possible that
these patients may die or suffer severe complications during the course of the
current trials or future trials. For example, in the trials to date, some of
the patients who have been in the transplant recovery process have died from
complications related to the patient's clinical condition that, according to the
physicians involved, were unrelated to the AastromReplicell/TM/ System
procedure. The Company may experience delays in patient accruals in its current
clinical trials or in future clinical trials, which could result in increased
costs associated with the clinical trials or delays in receiving regulatory
approvals and commercialization, if any. The results of preclinical studies and
early clinical trials of the Company's product candidates may not necessarily be
indicative of results that will be obtained from subsequent or more extensive
clinical trials. Further, there can be no assurance that pre-pivotal or pivotal
clinical trials of any of the Company's product candidates will demonstrate the
safety, reliability and efficacy of such products, or of the cells produced in
such products, to the extent necessary to obtain required regulatory approvals
or market acceptance. There can be no assurance that, even after the
expenditures of substantial time and financial resources, regulatory approval
will be obtained for any products developed by the Company.
12
European Regulatory Matters
The AastromReplicell/TM/ System components, are currently being regulated in
Europe as Class I Sterile or Class IIb medical devices, under the authority of
the new Medical Device Directives ("MDD") being implemented by European Union
("EU") member countries. In order for the Company to market its products in
Europe, it must obtain permission from a Notified Body to affix the CE Mark
which certifies that the Company and its operations comply with certain minimum
quality standards and compliance procedures, or, alternatively, that its
manufactured products meet a more limited set of requirements. Additionally, the
Company may be required to comply with certain country-specific regulations in
order to market its products. The Company has received approval to affix the CE
Mark to the AastromReplicell/TM/ System instrumentation platform and the various
components of its SC-I Therapy Kit for the production of bone marrow derived
cells and CB-I Therapy Kit used for expansion of umbilical cord blood cells.
While initial approvals have been obtained, there can be no assurance that the
Company and its suppliers will be able to meet the minimum requirements
necessary to maintain such compliance. Upon the completion of production-level
manufacturing and the Company's product release procedures, the CE Mark will
permit market introduction of the AastromReplicell/TM/ System in the EU. The
inability to complete the transition to production-level manufacturing of the
AastromReplicell/TM/ System or non-compliance with the ongoing regulatory
requirements to permit commercialization would have a material adverse effect on
the Company's business, financial condition and results of operations. Further,
there can be no assurance that the AastromReplicell/TM/ System will continue to
be regulated in Europe under its current status. If the AastromReplicell/TM/
System is not so regulated, the Company could be forced to obtain additional
regulatory approvals and could be subject to additional regulatory requirements
and uncertainty, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Third Parties for Materials
The Company currently arranges for the manufacture of its product candidates and
their components, including certain cytokines, serum and media, with third
parties, and expects to continue to do so for the foreseeable future. There can
be no assurance that the Company's supply of such key cytokines, components,
product candidates and other materials will not become limited, be interrupted
or become restricted to certain geographic regions. There can also be no
assurance that the Company will be able to obtain alternative components and
materials from other manufacturers of acceptable quality, or on terms or in
quantities acceptable to the Company, if at all. Additionally, there can be no
assurance that the Company will not require additional cytokines, components and
other materials to manufacture, use or market its product candidates, or that
necessary key components will be available for use by the Company in the markets
where it intends to sell its products. In the event that any of the Company's
key manufacturers or suppliers fail to perform their respective obligations or
the Company's supply of such cytokines, components or other materials becomes
limited or interrupted, the Company would not be able to market its product
candidates on a timely and cost-competitive basis, if at all, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. Certain of the compounds used by the Company in its
current stem cell
13
expansion process involve the use of animal-derived products. The availability
of these compounds for clinical and commercial use may become limited by
suppliers or restricted by regulatory authorities, which may impose a potential
competitive disadvantage for the Company's products compared to competing
products and procedures. There can be no assurance that the Company will not
experience delays or disadvantages related to the future availability of such
materials which would have a material adverse effect on the Company's business,
financial condition and results of operations.
History of Operating Losses
The Company is a development stage company and there can be no assurance that
its product candidates for cell therapy will be successful. The Company has not
yet completed the development and clinical trials of any of its product
candidates and, accordingly, has not yet begun to generate revenues from the
commercialization of any of its product candidates. The Company expects to
incur significant operating losses until commercialization of its product
candidates, primarily owing to its research and development programs, including
pre-clinical studies and clinical trials. The development of the Company's
products will require the Company to raise substantial additional funds or to
seek collaborative partners, or both, to finance related research and
development activities. Because of the Company's potential long-term funding
requirements, it may attempt to access the public or private equity markets if
and whenever conditions are favorable, even if it does not have an immediate
need for additional capital at that time. There can be no assurance that any
such additional funding will be available to the Company on reasonable terms, or
at all. Several factors will affect the Company's ability to raise necessary
additional funding, including market volatility of the Company's stock and
economic conditions affecting the public markets generally or some portion or
all of the technology sector. If adequate funds are not available, the Company
will be required to delay or terminate research and development programs,
curtail capital expenditures, and reduce or terminate business development and
other operating activities.
Year 2000 Issues
Many currently installed computer systems and software products are not capable
of distinguishing 20th century dates from 21st century dates. As a result, in
less than one year, computer systems and/or software used by many companies in a
wide variety of applications will experience operating difficulties unless they
are modified or upgraded to adequately process information involving, related
to, or dependent upon the century change. Significant uncertainty exists in the
software and information services industries concerning the scope and magnitude
of problems associated with the century change. In light of the potentially
broad effects of the year 2000 on a wide range of business systems, the Company
may be affected. The Company utilizes and is dependent upon data processing
computer hardware and software to conduct its business. The Company has
completed its assessment of its own computer systems and based upon this
assessment, the Company believes its computer systems are substantially "Year
2000 compliant;" that is, its computer systems are capable of adequately
distinguishing 21st century dates from 20th century dates. However, there can
be no assurance that the Company has timely identified or will timely identify
and remediate all significant Year 2000 problems in its own computer systems,
that remedial efforts subsequently made will not involve significant time and
expense,
14
or that such problems will not have a material adverse effect on the Company's
business, operating results and financial condition. The Company has yet to
determine the extent, or completed activities to minimize the risk, that the
computer systems of the Company's suppliers and manufactures are not Year 2000
compliant, or will not become compliant on a timely basis. The Company expects
that the process of making inquiries with these suppliers will be ongoing
through the end of 1999. If Year 2000 problems prevent any of the Company's
suppliers from timely delivery of products or services required by the Company,
the Company's operating results could be materially adversely affected. The
Company currently estimates that its costs to address the Year 2000 issue
relating to its suppliers will not be material, and that these costs will be
funded from its operating cash flows. To the extent practical, the Company
intends to identify alternative suppliers and manufactures in the event its
preferred suppliers become incapable of delivering products or services required
by the Company on a timely basis. The Company's estimates of Year 2000 costs
relating to its suppliers and manufactures are management's best estimates,
which were derived from numerous assumptions of future events, including the
continued availability of certain resources, third party remediation plans with
regard to Year 2000 issues, and other factors. There can be no assurance that
these estimates are correct and actual results could differ materially from
these estimates.
Private Equity Financing
In July 1998 the Registrant sold 5,000 shares of its newly created 1998 Series I
Convertible Preferred Stock (the "Series I Preferred") to one investor for an
aggregate purchase price of $5 million. The shares of Series I Preferred are
convertible, at the option of the holder, into shares of the Company's common
stock at the lower of (i) $4.81, or (ii) a price based on the market price of
the Company's common stock prior to conversion. With limited exceptions, the
shares of Series I Preferred are not convertible into common stock until April
1999 and, subject to extension under certain circumstances, will automatically
convert into common stock on July 2, 2001, unless sooner converted. As of
December 31, 1998, 4,000 shares of Series I Preferred remain outstanding. In
general, the Company may require the holders to convert the Series I Preferred
if the average closing bid price of the Company's common stock exceeds $9.62 for
specified periods beginning in July 1999. In connection with the sales of
Series I Preferred, the investor agreed to purchase an additional $3 million of
a new series of Preferred Stock (to be designated 1998 Series II Convertible
Preferred Stock) if the common stock of the Company trades at a price greater
than $6.00 for a specified duration during the period ending in August, 1999.
These business considerations, and others, are discussed in more detail and
should be read in conjunction with the Business Risks discussed in the Company's
Annual Report of Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(c) In December 1997, the Company issued 2,200,000 shares of its 5.5%
Convertible Preferred Stock ("5.5% Preferred Stock") in a
registered direct placement at a price of $5.00 per share. In
December 1998, all 2,200,000 shares of the 5.5% Preferred Stock
were converted into 2,240,326 shares of common stock. The shares
of common stock issued upon conversion were issued in a
transaction exempt from the registration requirements of the
Securities Act of 1933 by reason of Section 3(a)(9) thereof.
These shares were issued to existing security holders upon
conversion of outstanding securities of the Company in a
transaction where no commission or other remuneration was paid
directly or indirectly in connection with such exchange.
In July 1998 the Registrant sold 5,000 shares of Series I
Preferred. The shares of Series I Preferred are convertible, at
the option of the holder, into shares of the Registrant's common
stock at the lower of (i) $4.81, or (ii) a price based on the
market price of the Registrant's common stock prior to
conversion. The Company has issued 458,043 shares of common
stock, upon the conversion of 1,000 shares of Series I Preferred.
The shares of common stock issued upon conversion were issued in
a transaction exempt from the registration requirements of the
Securities Act of 1933 by reason of Section 3(a)(9) thereof.
These shares were issued to existing security holders upon
conversion of outstanding securities of the Company in a
transaction where no commission or other remuneration was paid
directly or indirectly in connection with such exchange.
Item 3. Defaults Upon Senior Securities
None.
16
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of Aastrom Biosciences, Inc.
was held on November 11, 1998.
(b) At the 1998 Annual Meeting of Shareholders, votes were cast on
matters submitted to the shareholders, as follows:
The election of two directors.
NOMINEE IN FAVOR WITHHELD
------- -------- --------
Robert J. Kunze 11,983,515 23,215
Steven G. Emerson, Ph.D. 11,982,715 24,015
Approval of the issuance of the Company's common stock upon the
conversion of up to 5,000 and 3,000 shares of the Series I
Preferred Stock and Series II Preferred Stock, respectively.
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
8,706,114 83,633 38,623 3,178,360
Approval of the selection of PricewaterhouseCoopers LLP as the
Company's independent public accountants for the year ending June
30, 1999.
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
11,986,025 7,100 13,605 0
Item 5. Other Information
In November 1998, Horst R. Witzel, Dr. Ing., retired from Aastrom's
board of directors and Joseph A. Taylor was appointed to the board. In February
1999, and following the termination of Aastrom's distribution agreement with
Cobe, Edward C. Wood, Jr. (President of Cobe BCT) resigned from the board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
See Exhibit Index.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the period.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AASTROM BIOSCIENCES, INC.
Date: February 9, 1999 /s/ R. Douglas Armstrong
-------------------------------
R. Douglas Armstrong, Ph.D.
President, Chief Executive Officer
(Principal Executive Officer)
Date: February 9, 1999 /s/ Todd E. Simpson
-------------------------------
Todd E. Simpson
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
18
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 * Restated Articles of Incorporation of the Company.
3.2 ** Bylaws of the Company.
4.1 *** Certificate of Designations Preferences and Rights of 1998 Series I
Preferred Stock.
4.2 Certificate of Designation of 5 1/2% Convertible Preferred Stock.
10.1 Cobe Termination and Transition Agreement.
10.2 Supplemental Agreement to Cobe Termination and Transition Agreement.
27.1 Financial Data Schedule.
________________________
* Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, as filed on March 7, 1997.
** Incorporated by reference to the Company's Registration Statement on
Form S-1 (No. 333-15415), declared effective on February 3, 1997.
*** Incorporated by reference to the Company's Form 8-K filed on July 15,
1998.
19